Question

Carlsbad Corporation's sales are expected to increase from $5 million in 2016 to $6 million in 2017, or by 20%. Its assets totaled $5 million at the end of 2016. Carlsbad is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2016, current liabilities are $1 million, consisting of $250,000 of accounts payable, $500,000 of notes payable, and $250,000 of accrued liabilities. Its profit margin is forecasted to be 5%, and the forecasted retention ratio is 45%. Use the AFN equation to forecast Carlsbad's additional funds needed for the coming year. Write out your answer completely. For example, 5 million should be entered as 5,000,000. Round your answer to the nearest cent.

Answer 1

Current Year:

Sales = $5,000,000
Profit Margin = 5%
Retention Ratio = 45%
Total Assets = $5,000,000

Spontaneous Liabilities = Accounts Payable + Accrued Liabilities
Spontaneous Liabilities = $250,000 + $250,000
Spontaneous Liabilities = $500,000

Next Year:

Sales = $6,000,000
Sales Growth Rate = 20%

Addition to Retained Earnings = Sales * Profit Margin * Retention Ratio
Addition to Retained Earnings = $6,000,000 * 5% * 45%
Addition to Retained Earnings = $135,000

Increase in Assets = Total Assets * Sales Growth Rate
Increase in Assets = $5,000,000 * 20%
Increase in Assets = $1,000,000

Increase in Spontaneous Liabilities = Spontaneous Liabilities * Sales Growth Rate
Increase in Spontaneous Liabilities = $500,000 * 20%
Increase in Spontaneous Liabilities = $100,000

Additional Funds Needed = Increase in Assets - Increase in Retained Earnings - Increase in Spontaneous Liabilities
Additional Funds Needed = $1,000,000 - $135,000 - $100,000
Additional Funds Needed = $765,000